Understanding transfer pricing: a case-based reasoning approach

This paper introduces the domain of transfer pricing, followed by an overview of case-based reasoning. Then, case-based reasoning is used to analyse the results of a questionnaire survey in transfer pricing. Finally, some conclusions are drawn and opportunities for future research identified. corporate goal for MNEs is often perceived to extend Transfer pricing beyond internal objectives to the maximisation of global Introduction to transfer pricing after tax profits. This objective may be achieved by using Transfer pricing is currently one of the most topical sub-transfer prices to utilise corporate tax rate differentials jects in the international taxation arena. In a recent sur-and shift income to countries where the corporate tax vey, Ernst and Young (1995a) 1 interviewed a sample of rate is lower. over 200 multinational enterprises (MNEs) from the One of the effects of the latest transfer pricing devel-Global 1000. It showed that transfer pricing was con-opments has been a shift in the balance between internal sidered to be the main international tax issue by 82% of (such as motivation or performance evaluation) and the sample (and 92% of UK MNEs). In addition, the external factors (such as tax), seemingly making the OECD and the US have published updated regulations external factors more influential. Bonfiglio (1995) con-on the tax treatment of transfer pricing. 2 In particular, tended that the 'Internal Revenue Service made it clear the OECD (1994) recognised that the role of MNEs in in the final regulations that from its perspective, inter-world trade had increased dramatically over the last 20 company pricing is a tax determination, not a financial years, and commented on the tax implications: or a business decision. Thus, the final regulations essentially will force the tax department (within the company) 'The growth of MNEs presents increasingly complex tax-to take a more prominent role in the development of the ation issues for both tax administrations and the MNEs company's international tax strategy and the implemen-themselves since separate country rules for the taxation of tation process than has previously been the case'. If this MNEs cannot be viewed in isolation but must be addressed in a broad international context. These issues arise primarily prediction turns out to be true, it will be insufficient for from the practical difficulty, for both MNEs and tax admin-companies to claim that internal prices are set in the istrations, of determining the income and expenses of a course of normal business …